Despite Modern Trend, Ohio Supreme Court Does Not Reconsider Prior Precedent – Finds Inadvertant Defective Work by Subcontractor can Never be a Fortuitous ‘Occurrence’

Clifford Shapiro | Barnes & Thornburg LLP | October 15, 2018

The Ohio Supreme Court ruled on Oct. 9, 2018, that property damage caused by a subcontractor’s faulty workmanship can never be an accidental “occurrence” within the meaning of the Commercial General Liability (CGL) insurance policy, and is therefore not covered. Ohio Northern University v. Charles Construction Services Inc., Case No. 2017-0514 (2018). In reaching this conclusion, Ohio’s highest court followed its own precedent instead of applying the reasoning used by the vast majority of courts that have reached the opposite conclusion in recent years.

Ohio Northern University (ONU) hired Charles Construction Services to oversee construction of an $8 million University Inn and Conference Center. Charles Construction obtained a general liability policy from Cincinnati Insurance Company. After the project was completed, the University discovered extensive water infiltration and other damage to the building. The University sued Charles Construction for breach of contract, and Charles Services filed third-party claims against several subcontractors. Cincinnati initially agreed to defend Charles Construction in the litigation under a reservation of its rights, and then obtained a trial court ruling finding that it had no duty to defend. The Appellate Court reversed, and the Ohio Supreme Court agreed to review the Appellate Court’s decision at Cincinnati’s request.

The Ohio Supreme Court reversed, finding that Cincinnati owed no duty to defend or to indemnify Charles Construction. The analysis in the decision is based entirely on the court’s 2012 decision in Westfield Ins. Co. v. Custom Agri Sys., Inc., 133 Ohio St.3d 476, 979 N.E.2d 269 (2012). In that case, the court held that “property damage caused by a contractor’s own faulty work” is not “fortuitous” and therefore is not an accidental “occurrence.”

The court viewed the issue in Charles Construction to be “nearly identical,” and therefore applied its reasoning in Custom Agri. Using that analysis, the court held that: “Property damage caused by a subcontractor’s faulty work is not an ‘occurrence’ under a CGL policy because it cannot be deemed fortuitous. Hence, the insurer is not required to defend the CGL policy holder against suit by the property owner or indemnify the insured against any damage caused by the insured’s subcontractor.”

The Ohio Supreme Court acknowledged that its decision is contrary to several recent decisions. Those decisions include the Tenth Circuit’s decision in Black & Veatch Corp. v. Aspen Insurance (UK) Ltd., 882 F.3d 952 (10th Cir. 2018) (predicting that the highest New York court would hold that resulting damage from faulty subcontractor work constitutes an “occurrence”), the New Jersey Supreme Court decision that changed New Jersey law in Cypress Point v. Adria Towers,2016 WL 4131662 (2016) (holding that the term “accident” in the CGL policy encompasses unintended and unexpected harm caused by negligent conduct, and that consequential harm caused by negligent work is an accidental “occurrence”), and the Iowa Supreme Court decision that changed Iowa law in National Surety Corp. v. Westlake Investments, 880 N.W.2d 724 (Iowa 2016) (discussing in detail the history and evolution of the CGL policy to change and clarify Iowa law by holding that “defective workmanship by an insured’s subcontractor may constitute an occurrence under the modern standard-form CGL policy containing a subcontractor exception to the ‘your work’ exclusion.”)

The decision issued by Ohio’s highest court does not reconsider the court’s reasoning in Custom Agri or address the legal analysis that is now used by most other courts that have carefully considered (and, in several cases, reconsidered) this issue in recent years. Instead, the Ohio Supreme Court applied its prior decision in Custom Agri without discussion of the important changes to the policy terms that most courts have concluded require a different conclusion. According to the court: “Regardless of any trend in the law, we must look to the plain and ordinary meaning of the language used in the CGL policy before us.” The court added: “When the language of a written contract is clear, we may look no further than the writing itself to find the intent of the parties.”

Contrary to the court’s explanation, its analysis in Custom Agri, and now Charles Construction, actually fails to apply the terms of the modern day CGL insurance policy. Instead, these decisions apply an outdated judicial gloss not found in the insurance policy itself to conclude that inadvertent faulty workmanship can never be “fortuitous” or “accidental.” This reasoning is rooted in analysis that was used by courts and commentators before the CGL policy terms were materially changed, including in 1986. Those changes modified the exclusions to clarify that the CGL policy provides coverage for certain kinds of property damage caused by inadvertent faulty workmanship. In other words, the coverage grant in the modern day CGL policy specifically anticipates that coverage can exist for property damage caused the accidental “occurrence” of faulty workmanship. The CGL policy exclusions then define and narrow the scope of the insurance coverage that is actually provided when property damage is caused by faulty workmanship. In particular, due to the “subcontractor exception” in the “your work” exclusion, the modern day CGL policy specifically anticipates and provides insurance coverage for a general contractor when property damage is caused by the faulty work of its subcontractors. This is especially true where (as in Charles Construction) the property damage arises after operations are complete and the damage is to something other than the subcontractor’s defective work itself.

The Ohio Supreme Court’s decision is contrary to the clear trend in the law on this issue, a trend that is based on more careful analysis of the current CGL policy terms. It is most unfortunate that the Ohio Supreme Court elected not to use the Charles Construction case as an opportunity to reconsider and to correct the faulty reasoning and analysis in the court’s 2012 Custom Agri decision. For more analysis of the important “occurrence” issue, please see the 50 state survey of case law discussing this issue that was prepared by the Barnes & Thornburg Construction Law Practice Group. It can be accessed here.

Underlying Assertion of Negligent Misrepresentation Is Not Necessarily an Occurrence

Nora Valenza-Frost | PropertyCasualtyFocus | September 14, 2018

Lumber

Courts sometimes struggle with the issue of whether property damage arising in the context of a contractual relationship, particularly in construction contracts, constitutes an “occurrence” under a standard commercial general liability (CGL) policy. Generally, but not always – and it varies from jurisdiction to jurisdiction – courts regard contractual breaches as non-accidental conduct, and/or apply the so-called “business risk” exclusions (such as the standard CGL “Your Work” exclusion), in finding no coverage. Lexington Ins. Co. v. Chicago Flameproof Wood Specialties Corp., No. 17-cv-3513 (N.D. Ill. Aug 10, 2018), a recent decision from a federal court in Illinois, is illustrative.

Lexington Insurance Company (“Lexington”) issued a CGL policy to Chicago Flameproof and Wood Specialties Corporation (“Chicago Flameproof”). The policy provided that Lexington would pay sums that Chicago Flameproof “becomes legally obligated to pay as damages because of bodily injury or property damage” that is “caused by an occurrence that takes place in the coverage territory” and that “occurs during the policy period.”

A framing contractor, required by contract to use fire-retardant-treated lumber meeting International Building Code (IBC) requirements, procured lumber from Chicago Flameproof to be used for the exterior walls of four buildings. The framing contractor contracted with Chicago Flameproof to buy D-Blaze lumber, but instead, was provided non-IBC-compliant lumber. As a result, the framing contractor was ultimately instructed to remove and replace the non-compliant lumber and sued Chicago Flameproof for negligently or fraudulently misrepresenting the type of lumber it was providing, resulting in damage to the exterior walls, wiring, and Tyvek insulation on the buildings, among other things (the “Underlying Actions”).

Chicago Flameproof sought coverage from Lexington, but Lexington challenged coverage and filed a declaratory judgment action, arguing that its duties to defend and indemnify were not triggered “because the claims against Chicago Flameproof do not involve property damage, were not the result of an occurrence, and were otherwise excluded by the policy’s business risk exclusions.” The parties moved for summary judgment, agreeing that no factual dispute existed and the only issue was the interpretation of the CGL policy, a question of law.

The court disagreed with Lexington’s argument that there was no “property damage” as the framing contractor sought to hold Chicago Flameproof “liable for physical injury to tangible property.” The court also disagreed with Lexington’s argument that the damage alleged was “nothing more than economic injuries stemming from the repair and replacement of the non-compliant lumber,” as there were “allegations of physical alterations to property other than the insured’s product” caused by the removal process which could fall within the definition of “property damage.”

However, the court acknowledged that, “for property damage to be covered by the CGL policy, it must be caused by an ‘occurrence.’” Illinois courts find an “occurrence” in the insurance context to mean:

An unforeseen occurrence, usually of an untoward or disastrous character or [a] … sudden, or unexpected event of an inflicting or unfortunate character…. However, even if the person performing the act did not intend or expect the result, if the result is the rational and probable consequence of the act, or, stated differently, the natural and ordinary consequence of the act, it is not an accident for liability insurance purposes.

Chicago Flameproof argued that the Underlying Actions satisfy the “occurrence” requirement “because they assert negligent misrepresentation and because Chicago Flameproof did not expect or intend the injuries to other building materials.” The court disagreed, and focused on the conduct alleged: Chicago Flameproof “failed to exercise reasonable care when it represented that it had D-Blaze lumber in stock and when it did not inform [the framing contractor] that its orders could be fulfilled.” Although couched in negligence terminology, the thrust of the complaints “is that Chicago Flameproof engaged in deliberate conduct – the shipping of the wrong lumber and the concealment of that fact – that caused the alleged property damage.”

The court reasoned that, even though Chicago Flameproof’s delivery of the lumber was allegedly intentional “does not necessarily mean that it expected or intended the collateral injuries to the exterior walls, wiring, and insulation…. Chicago Flameproof could have and should have reasonably anticipated that such injuries could result from supplying” the wrong lumber, which had to be torn out of the buildings. “These damages are the natural and ordinary consequence of knowingly supplying a non-compliant product and thus do not potentially fall within the CGL policy’s coverage.”

In concluding, the court stated that, although the Underlying Actions contain “one count for negligent misrepresentation, mere inclusion of a negligence theory does not – and cannot – by itself satisfy the occurrence requirement. Nowhere in the complaint are there allegations of an unforeseen or accidental event that produced property damage.”

This case is a helpful reminder that liability insurance cannot be used as a warranty for an insured’s failure to fulfill contractual undertakings, and that even if couched in a complaint as “negligent” conduct, when assessing an insurer’s duty to defend and indemnify under a CGL policy, careful consideration should be paid to the cause of the alleged damages when determining if there is an “occurrence.”

California Supreme Court Rights the “Occurrence” Ship: Unintended Harm Resulting from Intentional Conduct Triggers Coverage Under Liability Insurance Policy

Scott S. Thomas | Payne & Fears | June 6, 2018

SUMMARY

In a ruling that bodes well for policyholders, the California Supreme Court provides much-needed clarity on the question of when a so-called “intentional act” may give rise to insurance coverage under a liability insurance policy. In Liberty Surplus Insurance Corp. v. Ledesma & Meyer Construction Co., Case No. S23765 (Cal. June 4, 2018), the Court holds that an employer’s potential liability for negligent hiring, after its employee allegedly abused a 13-year old student, is the result of an “occurrence” and is thus covered under the employer’s liability insurance policy.

COURT OPINION

The court’s opinion dispels the misguided notion that an intentional act resulting in unintended harm is never an “occurrence” and can never trigger coverage. What matters, according to the Court, is that, from the insured’s point of view, the consequences of its conduct are “unexpected, unforeseen, or undesigned” – even if the conduct is intentional. And in a concurring opinion, Justice Liu rightfully questions the legitimacy of the notion that intentional conduct cannot trigger coverage, even when it produces an unintended result, unless, in the words of a 1989 appellate court decision, some “additional, unexpected, independent, and unforeseen happening occurs that produces the damage.” As Justice Liu explains, this intervening “happening” may be something as simple as the insured’s mistaken belief that he was acting in self-defense, or that the victim had consented to the insured’s conduct. This much-needed clarification restores vitality to the fundamental principle that injuries are “accidental” when they are “unexpected, unforeseen, or undesigned,” regardless of their cause.

KEY TAKEAWAYS

This ruling will apply in many contexts: For example, contractors who “intentionally” build things; competitors who “intentionally” disparage another’s product; employers who “intentionally” hire employees who do bad things. The Court’s decision restores the law’s fidelity to fundamental principles enunciated in the seminal California “occurrence” case: Gray v. Zurich, 65 Cal. 2d 263 (1966). And it ought to dampen insurers’ enthusiasm for denying claims on the spurious ground that the insured’s conduct – even though it resulted in bodily injury or property damage that the insured did not expect or intend to cause – was “intentional.”

The Tenth Circuit’s Prediction: New York State Likely to Follow Trend Recognizing Damages Caused by Subcontractor’s Faulty Work is a Covered “Occurrence”

By Frederic J. Giordano and Stephanie S. Gomez | K&L Gates | May 17, 2018

The United States Court of Appeals, Tenth Circuit recently issued a favorable decision for policyholders finding property damage arising from a subcontractor’s faulty work arose from an accidental “occurrence” under New York law.  In Black & Veatch Corp. v. Aspen Ins. (UK) Ltd,[1] a 2–1 Tenth Circuit panel agreed with Black & Veatch Corp. (“B&V”) that its excess policy — which contained a New York choice-of-law provision — covered claims for property damage to a third party caused by its subcontractor’s faulty work.[2]  The Tenth Circuit reversed the district court’s ruling that B&V’s subcontractor’s faulty work caused damage to only B&V’s own work and, therefore, was not a covered “occurrence.”[3]  The Tenth Circuit concluded the New York Court of Appeals would likely find the subcontractor’s faulty work was an accidental “occurrence,” following the growing trend of other state high courts that have addressed this coverage issue under commercial general liability (“CGL”) polices.[4]  Policyholders — whose policies are governed by New York law — should take notice and consider the implications of this decision on whether New York will soon join the majority view that faulty workmanship by a subcontractor can be an occurrence under CGL policies.

In 2005, B&V, a Kansas engineering firm, entered into contracts with American Electrical Power Service Corporation (“AEP”) to engineer several jet bubbling reactors (“JBRs”) — which eliminate contaminants from the exhaust emitted by coal-fueled power plants — at four coal-fire power plants in Ohio and Indiana.[5]  B&V subcontracted the work for the JBRs’ internal components.[6]  Deficiencies in the subcontractor’s work caused the JBRs’ internal components to deform, crack, and sometimes collapse.[7]  Subsequently, AEP notified B&V of the damaged JBRs arising from its subcontractor’s faulty work.[8]  AEP and B&V settled the dispute, and B&V agreed to pay more than $225 million in repair and replacement costs for its subcontractor’s defective internal components.[9]

After recovering $3.5 million from its primary insurer, B&V submitted coverage claims to Aspen Insurance Ltd. (“Aspen”) under its excess CGL policy (the “Policy”), which provided $25 million of limits per occurrence.[10]  Aspen denied coverage on the grounds that damage arising from and confined to B&V’s own work was not an “occurrence.”[11]  In 2012, B&V filed suit against Aspen in the U.S. District Court for the District of Kansas for breach of contract and declaratory judgment as to B&V’s rights under the Policy.[12]  Aspen cross-moved for partial summary judgment on the coverage issue.[13]  The district court granted Aspen’s motion, holding property damage arising from the construction defects were not covered “occurrences” under the Policy because only B&V’s own work product — the JBRs — was damaged by its subcontractor’s faulty workmanship.[14]  B&V appealed.[15]

The issue before the Tenth Circuit was whether the New York Court of Appeals would find that the Policy covers a portion of B&V’s payments to AEP to repair and replace the damaged JBRs.[16]  The Tenth Circuit predicted the Court of Appeals would decide that the damages to the JBRs constitute an “occurrence” that triggers coverage under the Policy and, therefore, vacated the district court’s summary judgment decision.[17]  The Tenth Circuit’s reasoning was based on, but not limited to, the Policy’s language, New York’s rule against surplusage, and the trend among state supreme courts.[18]

First, the Tenth Circuit held the subcontractor’s shoddy work constituted an “occurrence,” as that term is defined in the Policy, because it was accidental and harmed a third party’s property.  The Tenth Circuit considered the Policy’s (1) basic insuring agreement defining the general scope of coverage and key terms, (2) exclusions from coverage, and (3) exceptions to the exclusions.[19]  The Policy’s basic insuring agreement held that Aspen would pay on behalf of B&V sums in excess of the liability limit provided by other insurance policies which B&V would “become legally obligated to pay as damages for . . . ‘Bodily Injury’ or ‘Property Damage’ . . . caused by an ‘Occurrence.’”[20]  An “Occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions, that resulted in ‘Bodily Injury’ or ‘Property Damage’ that was not expected or not intended by the ‘Insured’.”[21]  “Property Damage” was defined as “physical injury to tangible property of a ‘Third Party’, including all resulting loss of use of that property of a ‘Third Party’ . . . .”[22]  The Policy also defined “Third Party” as “any company, entity, or human being other than an ‘Insured’ or other than a subsidiary, owned or controlled company or entity of an ‘Insured’.”[23]

The Tenth Circuit concluded the Policy covers damages arising from an “occurrence,” which includes an accident causing damage to the property of a third party — even though the term “accident” is not defined under the Policy.[24]  The Tenth Circuit reasoned B&V did not intend or expect its subcontractor to damage the JBRs.[25]  Because the JBRs’ construction defects were unintentional, they constituted an accidental “occurrence.”[26]  Next, the Tenth Circuit considered Aspen’s argument that damage to a third party did not occur since the Policy designated AEP as an additional insured, and the JBRs belonged to AEP.[27]  Disagreeing, the Court found that “when AEP claimed damages against B&V, the separation of insureds clause rendered AEP a third party with respect to its claims for property damage against B&V.”[28]  Thus, the damages involved physical harm to the property of a third party.

In further support of the ruling that it is a covered “occurrence,” the Tenth Circuit noted that Aspen’s interpretation of “occurrence” would render several Policy provisions “surplusage,” in violation of New York general principles of contract interpretation.[29]  The Policy included a “Your Work” exclusion that prohibited coverage for property damage to B&V’s own completed work.[30]  The “subcontractor exception” to the “Your Work” exclusion, however, provided that the exclusion did not apply “if the damaged work or the work out of which the damage arises was performed on [B&V’s] behalf by a subcontractor.”[31]  The Policy further contained “Endorsement 4,” which excluded coverage for property damage to “that particular part of real property” on which B&V or its subcontractor were actively working.[32]

Aspen’s interpretation of “occurrence” excluded accidental damage to B&V’s own work resulting from a subcontractor’s faulty workmanship.[33]  The Tenth Circuit found that the Policy’s “Your Work” exclusion and “subcontractor exception” would lose their meaning under Aspen’s definition of “occurrence” because “it would be redundant to say the Policy does not cover property damage to B&V’s own work (as stated in the ‘Your Work’ exclusion) if the definition of ‘occurrence’ categorically and preemptively precludes coverage for such damages in the first instance.”[34]  The Tenth Circuit further explained “there would there would be no reason for the Policy to state that it covers damages to [B&V]’s work when ‘the damaged work . . . was performed . . . by a subcontractor’ if the basic insuring agreement does not encompass these damages.”[35]  The Tenth Circuit further held Aspen’s interpretation of an “occurrence” would also render part of “Endorsement 4” meaningless if faulty workmanship resulting in damage to B&V’s own work could never trigger coverage as an “occurrence.”[36]  In essence, if the Policy could never cover damage to the B&V’s work in the first instance, then there would be no reason for “Endorsement 4” to exclude coverage only for damage to a “particular part” of the JBRs.[37]

General contractors should take note of the Tenth Circuit’s policyholder-friendly decision in Black & Veatch Corp., which provides guidance to insureds with policies governed by New York law.  Although New York’s highest court has not addressed whether construction defects caused by a subcontractor’s defective work constitutes a covered “occurrence” under CGL polices, the Tenth Circuit came to a significant conclusion while interpreting New York law.  Policyholders should keep an eye on whether New York “joins the clear trend” among other states’ interpretation of CGL coverage.

 

Notes

[1] 882 F.3d 952 (10th Cir. 2018).

[2] Id. at 971.

[3] Id. at 957.

[4] Id. at 971.

[5] Id. at 954.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Id. at 955–56.

[11] Id. at 956.

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Id.

[17] Id. at 956–57.

[18] Id. at 956–57, 962.

[19] Id. at 958.

[20] Id. at 955.

[21] Id.

[22] Id.

[23] Id.

[24] Id. at 965.

[25] Id. at 962–63.

[26] Id.

[27] Id. at 963.

[28] Id. at 964.

[29] Id.

[30] Id. at 955.

[31] Id. at 956.

[32] Id. at 955 (emphasis in the original).

[33] Id. at 964.

[34] Id.

[35] Id.

[36] Id. at 965.

[37] Id.

Faulty Workmanship, Even if Charged as Negligence, Isn’t Fortuitous Enough to Be an “Occurrence” Under Liability Policy

Richard Wolf | Claims Journal | April 16, 2018

Every once in a while, a court teaches us by judicial decision an entire chapter of insurance law lessons we can carry with us, secure in the knowledge that we can reason our way to the right result in insurance coverage disputes. Such a court opinion was filed March 30, 2018 by the US District Court for the Eastern District of Pennsylvania, applying Pennsylvania law. The case is State Farm Fire & Cas. Co. v. DTL Mechanical. It is reported at 2018 U.S. Dist. LEXIS 54953. It reminds us that commercial liability insurance is typically limited to defending against, or paying, damages from lawsuits against policyholders for property damage, bodily injury or personal and advertising injury, caused by an “occurrence”— an accident.

The facts of this State Farm case were certainly not unusual – which makes its teachings so useful, especially in resolving insurance coverage issues typically encountered in construction projects. Scott and Maria Evans engaged Bianco Contractors, Inc. (Bianco) to build an addition to their residence. Bianco, in turn, subcontracted with DTL Mechanical, LLC (DTL) to install a heating, ventilation and air conditioning (HVAC) system in the home addition. Numerous problems plagued the project, including the HVAC system, forcing the Evanses to replace what they alleged was a defectively designed and installed HVAC system. The property owners brought suit against Bianco in Pennsylvania state court, and Bianco sued DTL, alleging that the HVAC subcontractor was at fault in installing an improperly designed, sized and vented new HVAC system.

Bianco contended in the owners’ lawsuit that under the subcontract, DTL had assumed responsibility for installing a new HVAC system in the Evanses’ addition. The Evanses alleged that DTL’s work had failed to comply with pertinent building codes and DTL had breached implied warranties that the new HVAC system would comply with industry standards and be fit for ordinary usage. Bianco contended that the damages sustained by the Evanses were caused by DTL’s negligent performance of its installation work.

During the construction work, DTL was insured by a State Farm Business Owners liability insurance policy providing that State Farm would pay those sums Bianco became legally obligated to pay as damages because of bodily injury, property damage or personal and advertising injury caused by an “occurrence,” which the policy defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” (Emphasis added.)

The policy defined “property damage” as meaning “[p]hysical injury to tangible property, including all resulting loss of use of that property,” or “[l]oss of use of tangible property that is not physically injured or destroyed, provided such loss of use is caused by physical injury to or destruction of other tangible property.”

State Farm refused to defend or indemnify DTL in the state court lawsuit, because, the insurer said, the HVAC installation work, alleged by the Evanses and Bianco to have been negligently performed by DTL, did not constitute an “occurrence,” as defined by the policy.

Eventually, the Evanses, Bianco and DTL settled the state court litigation, with DTL assigning to the Evanses all of DTL’s rights of action under the State Farm liability policy based on the subcontractor’s right to a defense and/or indemnification, and any bad faith claims arising from State Farm’s refusal to indemnify and/or defend DTL in that lawsuit.

Still later State Farm brought suit in federal court against DTL and the Evanses for declaratory relief (the basis of federal court jurisdiction is unclear) and then moved for a summary judgment declaring that it did not owe DTL a defense or indemnification in the homeowners’ litigation against Bianco and DTL.

Procedurally, the court said, a summary judgment should be granted to State Farm if there is no genuine issue of material fact separating the parties, and, viewing the facts most favorably to the other parties, State Farm is entitled to judgment as a matter of law. A genuine issue of material fact exists if a reasonable jury could return a verdict for the nonmoving parties.

The homeowners asked the court to determine that they were entitled to recover as damages the cost of defending and indemnifying DTL for damages based on State Farm’s legal duties as a liability insurer for DTL in the litigation commenced by the Evanses. The court recited the general rule that the duty of a liability policy insurer to defend its policyholder is broader than the duty to indemnify it (see, e.g., California Practice Guide: Insurance Litigation (2016 Update), ¶ 7:501), so it necessarily follows that the insurer will not have a duty to indemnify its insured for a judgment in an action for which it was not required to provide it with a defense.

Accordingly, a typical first step in analyzing coverage is to assess whether the insurer has a duty to defend its policyholder. This is done by comparing the charging allegations of the complaint against the insured to the terms of the grant of coverage found in the policy of insurance. In this process, factual allegations of the complaint are taken as true and liberally construed in favor of the insured. The duty to defend is present if the allegations of the complaint could potentially fall within the coverage wording of the policy. In evaluating the policy duty to defend, the court must focus on factual allegations in the complaint, not the causes of action against the policyholder. In order to determine whether the duty to defend is triggered, the court held, a court must first examine the language of the insurance policy to determine the scope of coverage. Next, the court must analyze the complaint against the policyholder to determine if the claims asserted by the plaintiff potentially fall within the scope of the policy’s coverage.

The court concerned itself with a discussion of whether property damage caused by faulty workmanship qualifies as an “occurrence,” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The court, citing a decision of the Supreme Court of Pennsylvania, agreed that property damage caused by faulty workmanship is not an “occurrence”, because an “accident” requires a degree of fortuity not covered by faulty workmanship. Relying on the same case, the court in the new decision said that this type of policy does not cover “contractual liability of the insured because the product or completed work is not that for which the damaged person bargained.” Accordingly, an insurer has no duty to defend an insured against a lawsuit alleging only “property damage” resulting from poor workmanship. And this is true, moreover, even when faulty workmanship is cast as a negligence claim, is based upon a failure to follow industry standards or is couched as a breach of warranty.

Another coverage touchstone regarding liability insurance coverage analysis is that damages that are a reasonably foreseeable result of faulty workmanship are not covered. Put another way in the new case, there is no coverage under a liability insurance policy covering property damage where the only allegation of property damage involved damage to the completed construction work (here the HVAC system) itself, requiring its removal and replacement. The Pennsylvania Supreme Court decision the court relied on clarified that the risk intended to be insured against is the possibility of damage to property other than to the completed work itself – yet another touchstone in coverage analysis.

The court distinguished a decision where the court found coverage for a claim arising from an “occurrence” because, among other reasons, the plaintiffs asserted faulty workmanship claims for bodily injury. In the newly reported decision, on the other hand, the claims arose from DTL’s alleged faulty workmanship and the “foreseeable consequences of that workmanship” – replacing the HVAC system. Another decision distinguished in the current case completes the picture of coverage by involving claims against an industrial fan designer and manufacturer, where a fan failed due to design defects. The court concluded that the claims were an “occurrence” within the meaning of the policy, because they involved a product that actively malfunctioned, which could give rise to an “accident.”

Cleaning up the “campsite,” State Farm also moved for summary judgment on 13 counterclaims asserted against the insurer by the Evanses after they settled with the contractor and HVAC subcontractor and received an assignment from DTL of its claims against State Farm. The court held that, because all of the counterclaims other than one alleging insurer “bad faith” against State Farm fell outside the scope of the assignment of DTL’s rights of action against State Farm.

Finally, since the only counterclaim the Evanses owned and have standing to pursue as the real party in interest, is the one for “bad faith,” and the court already found that State Farm had no duty to defend or indemnify DTL for its faulty workmanship. It follows that DTL had no viable claim for bad faith –in its hands or in those of the Evanses.